AB InBev (BUD) Up 17% Year to Date: Is More Upside in Store?

World’s largest brewer, Anheuser-Busch InBev SA/NVBUD or AB InBev has gained 16.9% so far this year, outperforming the Zacks Consumer Staples sector’s growth of 13%. While the beer space has been grappling with intense competition, consumers’ changing preferences and sluggish North American growth, AB InBev has been riding on its robust geographical reach and diversified brand portfolio.

That said, let’s delve deeper into this Belgium brewer’s growth drivers and see if they can boost the stock further.

Diversified Portfolio Remains a Cushion

Given the accelerated shift toward low-and no-alcohol products, AB InBev keeps introducing near beer alternatives, along with no- and low-alcohol beers to provide greater choices to consumers. Evidently, the company recently announced plans to acquire Hiball — manufacturer of healthy, clean and premium energy drinks as well as a provider of organic sparkling water and juices under its Alta Palla brand. Another evidence of AB InBev’s commitment toward portfolio diversification is its contract with Starbucks Corporation SBUX to provide Teavana, a ready-to-drink tea. Well, management expects the low and no-alcohol beer category to account for about 20% of its global beer volumes by 2025.

Expansion in Craft Beer Space Bodes Well

AB InBev’s foray into the craft beer industry is another factor that highlights its practice of exploiting all possible growth opportunities. In order to make the most of this lucrative market, AB InBev has made numerous acquisitions to strengthen its position in the competitive craft beer space. The company’s strong craft beer portfolio includes well-known names like Karbach, Devils Backbone, Four Peaks, Goose Island and Golden Road among others. Given the heightened competition from craft brewers and increasing consumer demand, we believe that AB InBev is likely to benefit from its strategy of exploring the craft beer space.

SABMiller’s Buyout Fortifies AB InBev’s Market Reach

AB InBev has a strong geographical reach, with its operations spread across North America, Latin America (North, South & West), Europe, Middle East and Africa (EMEA), Asia Pacific. Further, AB InBev’s buyout of SABMiller has augmented its presence in the brewing space, thus creating the ‘first truly global beer company’. Notably, the combined entity has a dominant share in the global beer market. Also, media sources reveal that this buyout has lowered AB InBev’s exposure to the troubles looming over North America. The company is also likely to gain from solid sales at the emerging market, expected in fiscal 2017.

Dismal Earnings Surprise History a Concern

AB InBev’s earnings surprise history has been a disappointment, as the company delivered its sixth consecutive negative earnings surprise in second-quarter 2017. Moreover, the bottom line fell year over year owing to persistent weakness in Brazil, negative impact of mark-to-market adjustment and increased finance costs. In fact, the company stated that Brazilian economy is recuperating at a slow rate. Going forward, the company continues to expect witnessing increased cost of sales, owing to the lingering currency woes and growth of premium brands. Management also expects a more volatile scenario in some of its core regions. Consequently, the Zacks Consensus Estimate for the third quarter and 2017 has dropped 6.3% to $1.19 and 3.2% to $4.19, respectively over the past 60 days.

Nevertheless, management remains positive about Brazil’s long-run outcome. It also projects 2017 sales to be backed by growth of global brands and its commercial plans, including revenue management initiatives. Well, it looks like though the company may face some near-term hurdles, its long-term prospects look promising. Aptly, the stock carries a Zacks Rank #3 (Hold).